Crypto-Assets: an Investment Primer
What Are Cryptoeconomic Protocols?
The fundamental driver behind the innovation taking place is the emergence of cryptoeconomic protocols which are software protocols that harness a new field known as cryptoeconomics as an approach to solving problems.
Cryptoeconomic protocols uniquely enable:
· The existence of an independent and decentralised way to transact value for and between all individuals in society leading to sovereign individuals.
· The existence of a new economic field known as ‘cryptoeconomics’ whereby financial incentives can be used within open-source protocols to drive rational network members to behave in a manner which leads to a favourable outcome. This has the potential to reduce moral hazards which exist in today’s decision making models.
Together, these points will lead to a new decentralised business model whereby cryptoeconomic protocols take the place of companies in various industries with the concept of ownership being replaced by stakeholders who together add value to the network, whether that be developers, users or investors.
As this paradigm shift plays out, it will begin to fundamentally change the nature of economic relationships on a global basis and create new economic opportunities by both expanding current markets and creating new ones. Cryptoeconomic protocols and decentralisation will bring legacy systems and social architecture into the digital age allowing billions of people across the planet to interact peer-to-peer in a trust less manner and affecting trillions of dollars of economic activity in the process.
Cryptoeconomic Protocols as Part of a Wider Context
To understand the potential impact of cryptoeconomic protocols and the emerging asset class native to these networks, one must understand how this development sits in context of a much longer story.
The truth here is that technological change (whether hardware or software) continues to cause paradigm shifts in the business, consumer and hence investment landscapes.
The personal computer in 1975, the internet in 1990, the smart phone in 1995, cryptoeconomic protocols in 2008.
Value is created at the intersection of these various software protocols and hardware and drives economic growth. In the most recent leg of this story software has been making significant inroads into our lives, whether that be in our personal or business lives. For example, apps like Uber and Tinder in our personal lives have unlocked value. Software has also become the backbone of the vast majority of modern day organisations. And then there is Instagram at the intersection of our personal lives and business lives with social media marketing affecting the very landscape of branding.
Marc Andreesen aptly said, “Software is eating the world”. I feel that this statement really sums up the gravity of the potential for cryptoeconomic protocols to create value. Cryptoeconomic protocols simply represent an evolution of software in the sense that we can now incorporate economic incentives into the design of a piece of software.
Also, I believe that blockchain technology, as a decentralised way to coordinate human activity without trust is part of a wider shift that has been taking place for centuries of increased cooperation as opposed to fragmentation yet also hands sovereignty back to individuals with centralised solutions for cooperation having done the opposite.
With this technological innovation, a new asset class has been born. Crypto-assets are the financial incentive layer of cryptoeconomic protocols.
This new asset class offers differentiated investment opportunities for investors.
Macro Investment Themes
There are two distinct top-down macro themes and the differences here are important, most notably for their effect on valuation.
Two macro investment cases:
1. Decentralised infrastructure for the next generation of the Web which incorporates IoT and smart devices as well as intersects with other emerging technologies.
Cryptoeconomic protocols as decentralised open source software with digitally native economic incentives, will form the infrastructure layer of the next generation of the Web. This will birth a variety of decentralised applications to solve problems across a variety of different industries in ways not possible before. By being able to combine cryptography (and the security and trust it brings) with economic incentives, using technology which is open source decentralised and hence promotes self-sovereignty, previously dormant markets will be unlocked.
At the highest level, each of these crypto-assets is backed by non-speculative usage of their underlying networks and the cryptoeconomics of the token design and other incentive mechanisms which underline the functionality of the network.
2. Reinvention of the Monetary and Financial System
This is essentially the investment case for cryptocurrencies and some other cryptoeconomic protocols categorised as financial applications. The case for the latter overlaps with the first investment case. When we look at the features and valuations of incumbent assets that fulfil these use cases at scale, cryptocurrencies look undervalued.
Money has 3 main features:
1. Store of value
2. Means of exchange
3. Unit of Account
In general, decentralised cryptocurrencies as non-sovereign financial assets are superior to current stores of value such as Gold and potentially foreign reserves. The value of a monetary store of value is in the trillions if based on gold and foreign reserve values.
With the use of financial applications changing the architecture of the financial system, we could also see the use of other mediums of exchange at scale aside from fiat currencies. New financial products could evolve which will allow greater access to financial services and in more situations than were previously possible. Value transfer will take a big swing back in the direction of being permission less.
And finally, a non-sovereign unit of account could emerge from the cryptocurrency space for international trade and global commodities markets.
